Zoomlion Heavy Industry Science and Technology Co., Ltd.'s (SZSE:000157) Has Been On A Rise But Financial Prospects Look Weak: Is The Stock Overpriced?

Zoomlion Heavy Industry Science and Technology (SZSE:000157) has had a great run on the share market with its stock up by a significant 20% over the last month. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. In this article, we decided to focus on Zoomlion Heavy Industry Science and Technology's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Zoomlion Heavy Industry Science and Technology

How Is ROE Calculated?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Zoomlion Heavy Industry Science and Technology is:

7.0% = CN¥4.1b ÷ CN¥59b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.07 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Zoomlion Heavy Industry Science and Technology's Earnings Growth And 7.0% ROE

When you first look at it, Zoomlion Heavy Industry Science and Technology's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 7.0%, so we won't completely dismiss the company. But then again, Zoomlion Heavy Industry Science and Technology's five year net income shrunk at a rate of 13%. Remember, the company's ROE is a bit low to begin with. Hence, this goes some way in explaining the shrinking earnings.

That being said, we compared Zoomlion Heavy Industry Science and Technology's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 8.7% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. What is 000157 worth today? The intrinsic value infographic in our free research report helps visualize whether 000157 is currently mispriced by the market.

Is Zoomlion Heavy Industry Science and Technology Efficiently Re-investing Its Profits?

Zoomlion Heavy Industry Science and Technology has a high three-year median payout ratio of 74% (that is, it is retaining 26% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. You can see the 3 risks we have identified for Zoomlion Heavy Industry Science and Technology by visiting our risks dashboard for free on our platform here.

Additionally, Zoomlion Heavy Industry Science and Technology has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 49% over the next three years. As a result, the expected drop in Zoomlion Heavy Industry Science and Technology's payout ratio explains the anticipated rise in the company's future ROE to 9.6%, over the same period.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Zoomlion Heavy Industry Science and Technology. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.